Do you only make the minimum payments on your credit cards? Lots of people do… in April 2017 the FCA, who regulate banks and credit card providers, estimated that there are four million credit card accounts in what they call long-term, persistent debt.
If money is tight, you may feel, minimum payments are your only option, but do you know how much they are costing you? Two out of five adults in Britain have no idea how long it takes to repay credit cards debts.
Why credit card minimums add up to so much
Credit card minimum payments drop each month by a little bit. That might sound like good news, but it means that you are trapped into making interest payments for a very long time. Each month you mostly paying off interest and very little of the amount you actually borrowed, so your debt shrinks really slowly.
These calculations are so complicated that hardly anyone understands them! For almost everyone, the interest calculations and the minimum payments that appear on their monthly credit card statement are a complete mystery.
It’s in the banks’ interest to keep it like this – there is a simple solution described below to this minimum payment trap, but if everyone did this, then the banks wouldn’t be making nearly as much money out of you…
“That buggy example – isn’t that an exaggeration?”
Well obviously it depends on what you spend on the buggy and what interest rate you are paying, but see for yourself… here is a calculator that lets you put in the minimum details for your own credit card. If you don’t know this – and most people don’t! – you can choose one of six preset examples. Depending on what you put in, if you only pay the minimum amount, then it could take 10, 13, 15 years or more to pay it all off.
“15 years? That shouldn’t be legal!”
It certainly isn’t what most people would expect to happen. The Financial Conduct Authority which regulates credit card providers has adopted “treating customers fairly” as one of its basic policies. I don’t think the banks are giving people a clear enough description of what will happen if they only pay the credit card minimum payment. Why shouldn’t your statement say “If you only pay the minimum amount, it will take X years to repay your current balance and will cost you £Y in interest.” ?
The simple solution
So what can you do if money is tight and you are thinking “I can only afford the minimum amount.” Of course it would be great to be able to pay off your whole bill, but for many people that just isn’t going to happen.
There is one simple approach which won’t cost you much but which can make a dramatic difference. Suppose you have bought that £500 baby travel system on your Barclaycard and you are paying 20% interest. Put those figures into the above calculator and it tells you:
- This £500 debt will take 12 years and 10 months and cost £571 in interest.
I’ve worked out that the first minimum payment on this debt would be £12.65. Suppose you were to round this up to £13, that’s just 45p more. If you then pay this amount every month, the calculator gives you a very different answer:
- This £500 debt will take 4 years and 11 months and cost £260 in interest
So by making a tiny difference at the start and then fixing that amount, you are going to pay off the debt nearly 8 years sooner and save more than £300 in interest. No wonder the banks don’t want to tell you this!
Have a look at another example. The following graph comes from the Money Charity:
So if you can switch to paying a fixed amount instead of the minimum, it’s not going to be expensive for you, but you will be out of debt many years sooner.
Could you get a refund of interest?
If you have already been paying the minimum amount for ages and during this time the credit card or catalogue has increased your credit limit, you may be able to get a refund! See When you should ask for a catalogue refund for details.